Abstract

Income inequality and house prices have risen sharply in developed countries during the last
three decades. We argue that this co-movement is no coincidence but that inequality has
driven up house prices on the grounds that it raises the total demand for houses, which inflates
their prices considering supply restrictions. To test this hypothesis, we conduct cointegration
tests for a panel of 18 OECD countries for the period 1975-2010. The results suggest that
income inequality and house prices in most OECD countries are positively correlated and
cointegrated, and that in the majority of cases absolute inequality Granger-causes house
prices when measured in absolute terms. Relative inequality, on the other hand, is not
cointegrated with house prices, which is expected given that total house demand depends on
the absolute amount of investible income.